(Recasts with supply, adds quotes, details, updates prices)
* Prices fall as data points to bullish economy
* Treasury to sell $96 bln new supply next week
* Bond market to close early Thursday, closed all day Friday
* Treasury sells $18 bln, 5-year TIPS to strong indirect demand
NEW YORK, April 17 (Reuters) - U.S. Treasuries prices fell on Thursday as data pointed towards a strengthening economy, and as traders prepared for $96 billion in new coupon-bearing supply next week. Initial claims for state unemployment benefits ticked up 2,000 to a seasonally adjusted 304,000 for the week ended April 12, the Labor Department said on Thursday. They stayed close to a 6-1/2 year low touched the prior week. The Philadelphia Federal Reserve Bank also said factory activity in the U.S. mid-Atlantic region expanded in April at a faster clip than expected. Its business activity index rose to 16.6 from 9.0 in March, topping economists' expectations for 10.0, according to a Reuters poll. "Winter weather disruptions are being reversed with gusto," said Michael Englund, chief economist at Action Economics in Boulder, Colorado. The data comes a day after Federal Reserve Chair Janet Yellen took an optimistic tone on the economy but also stressed that interest rate increases, still far away, will depend on employment and inflation targets. "There is follow through from yesterday, there was significant selling in the middle of the curve," said Tom Tucci, head of Treasuries trading at CIBC in New York. Low liquidity before the early close is likely adding to the price pressure, he added. The bond market will close at 2 pm EDT (6 pm GMT) on Thursday and be closed on Friday for the Good Friday holiday. Five-year and seven-year notes, which are the most sensitive to interest rate policy, have underperformed in recent sessions, which some traders attribute to a large investor selling the notes and buying 30-year bonds in a readjustment of a position betting on changes in the Treasuries yield curve. "There was a large buyer of bonds and seller of notes in the middle of the curve," said Tom Di Galoma, head of fixed income rates at ED&F Man Capital Markets in New York. The relative cheapening of the intermediate-dated notes may help attract demand to next week's debt auctions. The U.S. government will sell $32 billion in two-year notes on Tuesday, $35 billion in five-year notes on Wednesday and $29 billion in seven-year notes on Thursday. "I think demand will pick up for the five-year sector, the middle of the curve has gotten beat up over the last five trading days due to the yield curve flattening," said Di Galoma. He sees yields continuing to rise into next week's supply and April's employment report, which will be released the following week. Five-year notes were last down 11/32 in price to yield 1.73 percent, up from 1.66 percent late on Wednesday. Seven-year notes fell 17/32 in price to yield 2.29 percent, up from 2.21 percent. Benchmark 10-year notes dropped 20/32 in price to yield 2.71 percent, up from 2.64 percent. The yields have risen from one-and-a-half month lows of 2.60 percent on Tuesday, when concerns about escalating tension in Ukraine sparked safety buying and a weak New York manufacturing survey raised fears over the strength of the U.S. recovery. Thirty-year bonds fell 29/32 in price to yield 3.50 percent, up from 3.45 percent. The Treasury also sold $18 billion in five-year Treasury inflation-protected securities, or TIPS, on Thursday to strong demand from indirect bidders, which includes many fund managers and other firms. The notes were sold at high yield of minus-0.213 percent, more than 5 basis points below where it had traded before the auction, and indirect bidders took the highest ever share, based on available data going back to 2004.
(Editing by Chizu Nomiyama)